Economy and Society- July 12, 2022: ESG pulling Europe in opposite directions

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week

In Washington, D.C., and around the world

ESG pulling EU and the European Central Bank in opposite directions

While farmers in the Netherlands continue protests against new energy and fertilizer protocols, European Union regulators in Brussels and Frankfurt, respectively, appear to be moving in opposite directions on ESG-related matters.

On July 6, the European Union accepted the pleas made most notably by Germany and agreed to keep natural gas and nuclear energy in its green or sustainable energy classification – much to the chagrin of many in the Union. The EU decision was frustrating to many in the coalition:

“The European Union voted on Wednesday to keep some specific uses of natural gas and nuclear energy in its taxonomy of sustainable sources of energy.

Europe’s taxonomy is its classification system for defining “environmentally sustainable economic activities” for investors, policymakers and companies. This official opinion of the EU matters because it affects funding for projects as the region charts its path to address climate change. In theory, the taxonomy “aims to boost green investments and prevent ‘greenwashing,’” according to the EU’s parliament.

The vote on natural gas and nuclear energy follows one that was passed in February, which amounted to a referendum on what had been a particularly controversial piece of the ruling. Natural gas emits 58.5% as much carbon dioxide as coal, according to the U.S. Energy Information Association. Nuclear power does not generate any emissions, though it draws criticism surrounding the problem of storing radioactive waste….

The EU is still required to reduce greenhouse gas emissions by at least 55% at the end of the decade and to become climate neutral in 2050, in accordance with European Climate Law. But Wednesday’s vote shows that at the same time the EU wants to encourage private investment in natural gas and nuclear as the region makes the transition from fossil fuels, particularly coal, to clean energy….

There was a flurry of opposition to the decision.

Some observers objected to the fact that continuing to use natural gas means an ongoing dependence on Russian energy.

“I’m in shock. Russia’s war against Ukraine is a war paid for by climate-heating fossil fuels and the European Parliament just voted to boost billions of funding to fossil gas from Russia,” Svitlana Krakovska, a Ukrainian scientist on the Intergovernmental Panel on Climate Change, said in a statement shared by the European Climate Foundation, a philanthropic advocacy initiative that fights climate change.

Others say the inclusion of natural gas in the taxonomy undermines its goal to prevent greenwashing.

“With gas in the Taxonomy, the European Union has missed its chance to set a gold standard for sustainable finance. Instead, it has set a dangerous precedent. Politics and vested interests have won over science,” said Laurence Tubiana, CEO of the European Climate Foundation, in a statement.”

Meanwhile, in Frankfurt, the European Central Bank moved in the other direction on green investments, agreeing to clean up its investment portfolio – although it too struggled with criticism leveled by advocates of more aggressive action:

“The European Central Bank will shift the corporate bonds it owns and accepts as collateral away from the most carbon-intensive companies, going further than most big rate-setting authorities but disappointing activists eager to see stronger measures.

Announcing plans to “tilt” its €386bn portfolio of corporate bonds away from companies with “a poorer climate performance”, the ECB said it “aims to gradually decarbonise its corporate bond holdings” in line with the 2015 Paris Agreement to limit global warming.

The central bank said it would also limit the share of non-financial corporate bonds with a “high carbon footprint” it accepts as collateral from individual counterparties, while requiring climate risk disclosure to hit certain levels before an asset or loan is accepted as collateral.

ECB president Christine Lagarde, who has made fighting climate change a key focus of her leadership, said: “Within our mandate, we are taking further concrete steps to incorporate climate change into our monetary policy operations.”

She added “there will be more steps” in future to align the ECB’s activities with the Paris Agreement to limit global warming to 1.5C since pre-industrial times. Temperatures have already risen at least 1.1C….

However, campaigners expressed disappointment that the ECB had not gone further. Greenpeace finance expert Mauricio Vargas said the measures announced on Monday were “overdue”, adding that the ECB “should actively sell the bonds of companies, like the big fossil fuel groups, that are not aligned with the goals of the Paris Agreement”….

The ECB on Monday defended the measures, however, saying they “aim to better take into account climate-related financial risk in the eurosystem balance sheet and, with reference to our secondary objective, support the green transition of the economy in line with the EU’s climate neutrality objectives”.

The shift in its corporate bond portfolio will come into force in October and will only affect how it reinvests the proceeds of maturing bonds it already owns after it stopped expanding its balance sheet last week.”

On Wall Street and in the private sector 

Abortion becomes an ESG issue

In the wake of the Supreme Court’s decision in the Dobbs case, which overturned Roe v. Wade and threw the question of legal abortion back to the states, corporations are also being asked – by employees and activists – to get involved. Some CEOs are eager to do so, while others are much more reluctant:

“Companies are being cautious and deliberative in how they factor abortion into their long-term ESG plans despite demands for swift action from shareholders, employees, and the public after the Supreme Court overturned Roe v. Wade.

Following the ruling in Dobbs v. Jackson Women’s Health Organization, companies including Microsoft Corp., Meta Platforms Inc., and JPMorgan Chase & Co. said they would help cover employees’ travel costs to access an abortion. Other companies have issued more neutral statements, citing their existing health benefits.

Critics on social media were quick to point to big corporations that didn’t immediately voice any statements, including Walmart Inc. In response, company CEO Doug McMillon told employees July 1 that Walmart’s leadership is listening to “many different viewpoints” from its employees and will work “thoughtfully and diligently to figure out the best path forward.”

Most businesses had time to plan an initial statement and response to Roe being overturned, given the draft opinion was leaked in May. But now, behind closed doors, those companies are mulling a mass of questions, including whether to accommodate part-time workers and provide paid sick leave for any travel….

Corporate executives and boards of directors must now plan for what consistent action they will take on reproductive health rights across their business, including responding to thorny investor questions about benefits and political spending, according to environmental, social, and governance (ESG) consultants.”

At the same time, opponents of ESG are weighing in to express their belief that getting involved in the abortion issue is well beyond the role of the corporation, and that executives who use corporate funds to pay for abortion procedures are unfairly and unethically taking from their shareholders. On July 11, Andy Puzder wrote the following:

“Woke capitalism attempts to reorient modern corporations from their traditional responsibility to generate returns for investors to a new mission of supporting leftist political activism. The Left has utilized this approach when advancing radical environmental policies, opposing Georgia’s voter-fraud protections, or challenging Florida’s law restricting instruction on gender identity and sexual orientation through the third grade.  

Now the Left is employing woke capitalism to advance its position on abortion…. President Biden has signed an executive order pushing back against potential state efforts to limit a woman’s ability to cross state lines for an abortion.

Biden’s executive order would protect the efforts of at least 60 U.S. corporations that have announced abortion travel benefits for employees unable to get abortions where they reside.

The monies to pay for these costs could otherwise be used to reduce operating expenses (increasing investors’ returns) or to pay dividends. These woke CEOs are not using their own money to fund this perk – they are using their investors’ monies to advance policies that these investors may well oppose. This is woke capitalism’s cornerstone: using other peoples’ resources to advance political goals.”

In the Ivory Tower

MIT research shows that ESG returns might be illusory – or fraudulent

In a press release late last month, the Sloan School of Management at MIT touted a paper (last revised in September 2021) co-authored by the school’s Florian Berg that purports to show that positive ESG return-on-investment is less about actual returns and more about retroactive fiddling with ESG scores:

“A research paper by MIT Sloan School of Management research associate Florian Berg and Kornelia Fabisik and Zacharias Sautner of the Frankfurt School of Finance and Management, validates these concerns, as they discovered “widespread and repeated” changes to the historical ESG scores by a leading vendor of this data.

Is history repeating itself? The (un)repeatable past of ESG ratings” won the John L. Weinberg/IRRCi Research Award from the Weinberg Center at the University of Delaware, which was presented at the 2022 Corporate Governance Symposium by the European Corporate Governance Institute (ECGI).

Berg says, “The incredible growth of sustainable finance has created a billion-dollar market for ESG data. Yet, we found that the data is not reliable or consistent. The changes made in ESG scores at any particular time in history are massive.”

He explains that the data for any specific point in time should remain the same for a firm unless there is a documented reason for a retroactive change. However, their study revealed significant unannounced and unexplained changes to the data provided by Refinitive ESG, which was previously owned by Thomson Reuters. For example, looking at two versions of the same Refinitive ESG data for identical firm years – one from September 2018 and the other from September 2020 – the median overall scores in the rewritten data were 18% lower than in the initial data.

“The score rewriting leads to large changes in what are deemed to be high- or low-ESG firms. This is important because the classification of firms is widely used in ESG research and the investment industry,” says Berg, cofounder and research associate of the MIT Sloan Sustainability Initiative’s Aggregate Confusion Project.

In their paper, the researchers highlight how firms that performed better in a given year experienced upgrades in their E and S scores for that year through the data rewriting. Using predictive regressions, they showed that investing in firms with higher ESG scores in the initial data would not have led to economically or statistically significant performance gains. Yet, in the rewritten data, they found economically large, statistically significant positive effects of the E&S score on the firm’s future stock returns.

“These large differences matter because this performance would not have been possible with the data available to investors when forming their investment strategies,” says Berg.”

Notable quotes

“The Many Reasons ESG Is a Loser,” Andy Kessler, The Wall Street Journal, July 10, 2022:

“Let’s look inside. BlackRock’s ESG Aware MSCI USA ETF has almost the same top holdings as its S&P 500 ETF with Apple, Microsoft, Amazon, Alphabet, Tesla, Nvidia, JP Morgan Chase, Johnson & Johnson and United Healthcare, dropping Berkshire Hathaway and moving Meta and Home Depot to higher weightings. Fees on ESG Aware are 0.15%, or 15 basis points. BlackRock’s plain-vanilla iShares Core S&P 500 ETF index fund charges only 3 basis points. That’s right, BlackRock charges five times as much for juggling a few names and slapping ESG on the name. Capitalists indeed. As of June 30, ESG Aware was down 23.7% vs. down 20% for the S&P 500 index.

Look away if you’re squeamish, but BlackRock helpfully notes that the S&P 500 has investments of 0.92% in controversial weapons, 0.59% in nuclear weapons, 0.68% in tobacco and 0.12% in United Nations Global Compact violators. Yikes. But not the BlackRock Sustainable Advantage Large Cap Core Fund, an actively managed fund with none of that icky stuff. On May 31 its top holdings were similar to the S&P 500 with lower weightings of Berkshire and UnitedHealth and increased weightings of Visa and Exxon. Exxon! Gross fees were 0.74% and net fees of 0.49% as BlackRock chooses to waive some fees. This fund was down 20.6% as of June 30.

So yes, you’re paying someone five to 15 times as much to adjust some weightings and perform worse. For BlackRock, ESG and sustainable investing don’t seem to be about responsible or socially just investing, they are simply a lucrative business model.”